Merryn Somerset Webb: Will We Ever Learn to Avoid Bubbles?
The same thing happens over and over again. There’s a great story. Everyone loves the story. Everyone buys. The reality doesn’t quite match the story. The asset class collapses.
It isn’t hard to spot a bubble forming. But experienced investors will know it’s very very hard to spot when it might finally come a cropper.
That’s partly because it doesn’t really need a catalyst;
it doesn’t require political disruption, financial scandal or shifts in monetary policy.
The end, as Societe Generale AG’s Albert Edwards points out, is often remarkably simple:
“A reversal in price momentum in an asset class that has risen sharply for a number of years (sucking in huge quantities of loose money) is often sufficient in itself to cause prices to crash.”
When there is no one left to buy or when a few of those who might have already bought become a little nervous, it all comes crashing down.
In that sense, you could think of all bubbles as a type of (legal) Ponzi scheme
ChatGPT and a wave of optimism that brushed rate worries to the side in a rush to embrace the idea that a new world is just around a very close corner.
Since the beginning of 2023, the US tech sector is up over 100% and the S&P by 50%. US growth stocks have already seen a $4.3 trillion rise in market capitalization since 2022 and the market has a whole a rise of $7 trillion.
Is that happening again? Of course.
The important thing for investors to remember is that, while it makes long-term sense to always participate in stock markets, you don’t actually need to participate in the bubbles (however tempting).
You can simply note them and buy something else
Merryn Somerset Webb Bloomberg 24 juli 2024
Merryn Somerset Webb at my blogg
Société Générale’s Albert Edwards
1929 202? The trend is your friend. And then the trend is not your friend.
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